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April 7th, 2016
Education • Finance

Social impact bonds for early childhood education in Utah

The concept of the social impact bond was developed by the UK’s Young Foundation. It aims to combine philanthropic giving with a financial return in order to meet a social need. It was applied in the state of Utah to early education to improve low-income children’s prospects in primary school and beyond.

The initiative

United Way of Salt Lake is a community-based charity that seeks to fight poverty and improve educational opportunities in the four Utah counties in which it operates. It promotes what it believes to be the right educational solution to the challenges it faces: The Utah High Quality Preschool Program. “Preschool can close this achievement gap so that all kids, regardless of their circumstances, have the same chance to succeed.” [2] The approach that United Way promote “builds on research conducted by Voices for Utah Children on the Granite School District preschool program, which delivers a high impact and targeted curriculum to increase school readiness and academic performance among three-and four-year-olds”. [3]

This kind of preschool intervention can be expensive. The means that was chosen to fund it was “America's first ‘Social Impact Bond' (SIB) or ‘Pay for Success' (PFS) transaction for early childhood education”, launched in August 2013. [4] Applying social impact investing, the J.B. & M.K. Pritzker Family Foundation and Goldman Sachs funded the programme in return for a results-based payout. The first payments were made in 2015 and amounted to US$260,000. They will continue until June 2021, when the cohort in question completes sixth grade.

The challenge

According to the 2014 figures published by the National Center for Children in Poverty, 38% of children in Utah live in low-income families. Many children from this background do not have English as a first language, and consequently start preschool education without basic literacy skills.

As a result of this initial disadvantage they are often unable to catch up with their classmates and eventually need to use special education and remedial services. “The provision of these services results in significant cost for schools and the state government, and represents a poor and avoidable outcome for the child.” [1]

The public impact

The public impact can be assessed in qualitative and quantitative terms: the preschool education that the children receive, and the total savings that the state of Utah makes because it does not have to pay for remedial education.

Goldman Sachs calculated that the savings in Year 1 for Cohort 1 were US$281,550, based on Utah's special education add-on of US$2,607 per child. The New York Times, among others, questioned these results, as being based on a false premise. “Goldman said its investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten. The bank received a payment for each of those children.” [5] It suggested, though, that 50 percent is the maximum differential and requires a significant investment. “‘To just assume that all these children would have gone to special education is kind of ridiculous,' said Ellen S. Peisner-Feinberg, a senior scientist at the Frank Porter Graham Child Development Institute.” [6]

However, Brenda Van Gorder, the director of preschool services at the local school district in Utah, stressed that the use of SIBs had led Goldman and the Pritzker Foundation to pay for a programme that the state of Utah would not have otherwise funded.

Stakeholder engagement

There was strong stakeholder support, the main actors being the state education services, Goldman Sachs, the Pritzker Foundation, United Way of Salt Lake (UWSL) and Voices for Utah Children. Governor Herbert of Utah also praised the programme, indicating that the state government was also supportive.

“Goldman Sachs - together with J.B. Pritzker and the United Way of Salt Lake - partnered to create the first ever SIB financing early childhood education. Goldman Sachs and Pritzker jointly committed up to $7 million to finance The Utah High Quality Preschool Program.” [7] As the New York Times commented in November 2015: “it was, in the vernacular of corporate America, a win-win: a bond that paid for preschool for underprivileged children in Utah while also making money for investors”.

United Way of Salt Lake committed US$1 million to serve as the repayment fund for the programme's first cohort. They provided this funding because the state of Utah had not passed legislation that would allow the state to join as the repayment agency. However, Salt Lake County joined UWSL as the first public entity in the state to make a Pay for Success disbursement and provided US$350,000 of funding.

The Washington Post echoed the New York Times's scepticism about the level of investment in the programme, though: “to some critics an example of a common problem: Lawmakers want to harness the oft-touted benefits of early-childhood education without investing enough to ensure quality”. [8]

Political commitment

“Gov. Gary R. Herbert of Utah hailed the program as a model for a new way of financing public projects.” [9] There is clearly a political commitment at state level to preschool education and to the combination of public-private partnership and social impact investing in education that this programme exemplifies.

As examples of federal and state investment in preschool education, the following can be cited:

  • “The Obama administration last year awarded an $11.5 million grant to expand the online program into rural communities to study how well it prepares children for kindergarten.” [10]
  • “In 2014, the Utah State Legislature passed HB96, the Utah School Readiness Initiative sponsored by Representative Greg Hughes. This legislation established the School Readiness Board, comprised of appointees ... and other individuals committed to advancing early childhood education in Utah.” [11]

Clarity of objectives

The project aims to “improve the education attainment of young people and prevent them from needing special and remedial education later in their school career.” [12]

Strength of evidence

The term ‘social impact bonds' was coined by Geoff Mulgan, Chief Executive of the Young Foundation, in papers published between 2008 and 2011. He defined SIBs as: “funding mechanisms which invest in social outcomes. They have three elements: monetary investment (for example, £x million from local authorities, commercial investors, philanthropists or foundations); a programme of actions to improve the prospects of a group ...; and commitments by national or local Government, or foundations, to make payments linked to improved social outcomes achieved by the group”. [13]

The first SIBs were launched by UK-based Social Finance Ltd. in September 2010. They were implemented through pilot projects to encourage private investors to work with the public and community services to deliver real and sustainable solutions.

The idea has been piloted elsewhere, in Australia and the US:

  • “The NSW Liberals & Nationals Government has announced the rolling out of a pilot program to establish Australia's first innovative financial bond in the 2011-12 Budget.” [14]
  • President Obama instituted the ‘Pay for Success' model in the US, enabling up to US$100m to “be freed up to run pilot schemes to test the idea ... and repayment be made contingent on performance.” [15]

Feasibility

The feasibility of preschool education programmes as a means of reducing the need for remedial education had been tested in Utah. “In a longitudinal study conducted between 2006 and 2009, the Granite School District preschool program demonstrated that 33 percent of low-income students would likely have needed special education services. After participating in the program, 95 percent of those children no longer needed special education.” [16]

The SIB programme was started as a ‘proof of concept' in its first year. “For the first cohort of 595 students, 110 of the students who were four years old when the program started tested as likely to need special education services. After the end of these students' kindergarten year, only one out of the 110 required special education. This resulted in a total Year 1 savings for Cohort 1 of $281,550.” [17] This was predicated on the accuracy of the testing of the first cohort as “likely to need special education services”, which was questioned by a number of education experts.

Management

The programme is managed by different bodies where each of them is assigned a specific role, so that the tasks can be streamlined:

  • The educational programme is coordinated by Voice of Utah.
  • Granite School District, Park City School District, Guadalupe School, Lit'l Scholars, Smart Kids, and YMCA are the preschool education service providers.
  • The initial funding was provided in the form of SIBs - “a US$4.6 million senior loan is provided by Goldman Sachs, and a US$2.4 million junior loan by the J.B. Pritzker Foundation”. [18]
  • United Way of Salt Lake acts as an intermediary between the educational and investment parties.

Measurement

“Outcome payments are dependent upon a decrease in the use of special education in k-6. At the beginning of the pre-school programme, participants are given the Peabody Picture Vocabulary Test (PPVT), a strong predictor of future need of special or remedial education. Those children scoring 70 or less enter the ‘payment' cohort; the payment cohort is at-risk of needing special or remedial education at some point in their education in the absence of the intervention. These students are then tracked through 6th grade to determine if they use special education services, with investors receiving a payment for every year that special education is avoided.” [19]

There are, though, question about whether this measurement process is an accurate reflection of the value of this educational intervention and whether the investment returns on the SIBs are therefore reasonable. This issue is set out above in Public impact and developed below. “Yet since the Utah results were disclosed, questions have emerged about whether the program achieved the success that was claimed. Nine early-education experts who reviewed the program for The New York Times quickly identified a number of irregularities in how the program's success was measured, which seem to have led Goldman and the state to significantly overstate the effect that the investment had achieved in helping young children avoid special education.” [20]

Alignment

Actors were strongly aligned to achieve the objectives set by the programme, as everyone worked energetically towards its implementation. As the intermediary, United Way of Salt Lake continues to oversee the implementation of the project, contracting with the funding partners and assisting the preschool education providers. It is also aligned with the state administration. “The State of Utah and the School Readiness Board entered into a contract with United Way of Salt Lake as an intermediary in the transaction and commit to repay investors through the intermediary if the program is successful in meeting impact metrics.” [21]

The Utah State University coordinates with service providers to administer the PPVT to all children in the cohort and tracks special education usage for the children from kindergarten through to sixth grade. The Park City Community Foundation provides an independent account to hold repayment funds.

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